Social Security is NOT going away

Contrary to what you may have heard or read, Social Security is NOT going away.

Yes, the Social Security system is strained.  Yes, the Social Security trust fund is expected to deplete in 15 years.  Nonetheless, there is still no reason to believe benefit payments will stop.

To better appreciate the facts of what may happen, it helps to understand how the Social Security system works:

All the income received by the Social Security program goes into the Social Security trust fund.  All the benefits and expenses paid by the program come out of the trust fund.  If there is more coming in than going out, the trust fund grows.  If there is more going out than coming in, the trust fund shrinks.

It’s also important to understand the inflows and outflows of the Social Security system are separate and distinct from all other general government inflows and outflows.

Therefore, the health of the Social Security system is independent of the health of the broader U.S. government budget.

There are three sources of income into the Social Security trust fund:

1. Payroll taxes – most people who are employed in the U.S. are required to have Social Security taxes deducted directly from their paychecks.
2. Taxation on Social Security benefits – up to 85% of Social Security payments may be subject to income tax.
3. Interest on trust fund balances – all money in the trust fund is invested in interest-bearing securities issued by the U.S. Treasury.

There are three uses of funds from the Social Security trust fund:

1. Benefit payments – all the benefits paid to Social Security recipients.
2. Administrative expenses – the cost of maintaining Social Security offices, employee wages, technology, etc.
3. “Other” expenses – mainly special retirement benefits paid to certain railroad workers, but also other miscellaneous expenses.

In recent years, the Social Security system has been taking in more than it has been paying out.  Therefore, the trust fund has been growing.  However, during 2020, the system will begin paying out more than it takes in.  Additionally, it’s anticipated this trend will continue for the foreseeable future.   Based on current estimates, these deficits will deplete the trust fund in 15 years.

Once the trust fund is depleted, the money coming into the system will only be enough to cover about 80% of what’s supposed to go out.  That means, even after the trust fund runs out, people can still expect to receive about 80% of their benefits.

There are many changes which can be made to help bolster the Social Security system.  However, all potential changes ultimately boil down to 1) making people pay more in and/or 2) paying less out.  Obviously, neither of these options are palatable.

In my opinion, politicians are more likely to implement changes which will adversely impact people who are not yet receiving Social Security as opposed to those who are.

So, what’s my practical planning advice with regards to Social Security???  I feel it’s safe to assume people who are 60 or older can expect to receive their full benefits for the rest of their lives.  People who are in their 20’s should expect to receive only 80% of their estimated benefits.   Everyone else should probably plan on something in between.